Tax Notes - Floor Covering Installation Services
(12/03/07)

Floor Covering Installation
Prior to October 1, 2006, a floor covering installer (whether considered a floor covering dealer/retail seller or a contractor) did not collect sales tax on the labor portion of the bill when the installation of floor covering resulted in a capital improvement to real property.

On and after October 1, 2006, charges for the installation of floor covering are subject to tax. (P.L. 2006, c. 44). The tax is applicable to sales by a floor covering installer to a property owner, including a real estate developer. For purposes of the sales tax law, contractors and subcontractors are entities that work on the real property of others. See examples below.

Thus, the labor to install the following flooring materials on floors is subject to tax on and after October 1, 2006:

Wall-to-wall carpet

Wall-to-wall carpet which is permanently glued to the subfloor

Wall-to-wall carpet installed by tack and pad

“Click” laminate flooring

Ceramic or vinyl tile

Glued-down vinyl and linoleum

Hardwood flooring

Industrial, institutional, commercial, polymer, and epoxy flooring

Examples
ABC Floor Covering Installer has a contract with a property owner for the installation of floor covering services, such as carpeting on existing construction. ABC Floor Covering Installer hires Subcontractor to perform the taxable floor covering services. Since ABC Floor Covering Installer is charging the property owner for a taxable service, ABC Floor Covering Installer collects tax from the property owner. The amount charged to ABC Floor Covering Installer by the Subcontractor is not a taxable receipt.

XYZ real estate Developer is constructing a home to sell to the public. XYZ Developer hires ABC Floor Covering Installer to perform taxable floor covering installation services . XYZ Developer is the property owner and end-consumer of the floor covering installation services and must pay tax on the amount charged by ABC Floor Covering Installer.

XYZ real estate Developer is constructing a home to sell to the public. XYZ Developer hires GC General Contractor. GC hires ABC Subcontractor Floor Covering Installer to perform taxable floor covering services. XYZ Developer is the property owner, and thus, the end-consumer of the floor covering services, and must pay tax on the amount charged by GC for the floor covering services. The amount charged to GC by ABC Subcontractor Floor Covering Installer is not a taxable receipt.
Transition From Exempt Capital Improvement To Taxable Service
If the floor covering installer performs a taxable service which was previously exempt as a capital improvement and such service began prior to October 1, 2006, and continues on and after October 1, 2006, the installer must charge 7% tax on the sale of the services that are completed on and after October 1, 2006. This rule applies whether or not payment has been made in whole or in part prior to the performance of the service.

Floor Covering Material Purchases
The law has not changed in regard to the taxability of floor covering materials. The floor covering dealer treats his purchases of floor covering materials (carpeting, tile, linoleum, wood, etc.) as purchases for resale. The dealer will issue a Resale Certificate (Form ST-3) to his supplier or wholesaler and does not pay sales tax on the cost of the floor covering which he purchases as inventory. The dealer will then collect sales tax from the customer or end-user of the product (property owner, contractor or dealer) based on the sale price of the floor covering unless the customer furnishes a properly completed exemption certificate or unless the dealer delivers the floor covering to the customer outside of New Jersey.

If instead a contractor is selling and installing flooring, the contractor pays tax on the purchase of the floor covering materials since the law considers the contractor to be the final consumer (or end-user) of these items. However, if the contractor charges a lump sum for the installation service, without separating the charge for materials from the charge for labor, the customer will be charged sales tax on the total amount of the bill.

Flooring Materials Applied to Walls or Ceilings.
The installation of floor covering materials to walls or ceilings, which qualifies as a capital improvement to real property, is exempt from sales tax. The charge for installing these same materials as flooring is taxable. For these purposes, floor covering material does not include more than the height of a transition floor piece.